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Trading Tactics for Long-Term Planning

“Stick to the plan.” It’s not just an action movie cliché—it’s a critical aspect of making profitable trades and removing your emotions from the decision-making process. And it’s equally important when investing for your long-term goals.

Unfortunately, planning for the long term can sometimes be a blind spot for traders, who will fastidiously map out their short- and immediate-term trade plans, but fail to give the same attention to other financial objectives.

The good news is that traders are in a prime position to remedy this. Many of the disciplined processes and strategies that trading requires can be applied to long-term planning, as well.

1. Set specific targets

We often talk about the importance of knowing your profit objective before you enter a trade because it gives you an exact price for which to aim. It’s equally important to set targets when saving for retirement and other hard-to-quantify financial goals. It’s not enough to put money away each year without knowing how much you’ll reasonably need. In reality, many savers underestimate these figures or fall back on the notion that they can reduce their spending later to close any gaps.

For retirement in particular, make sure you figure out your goal early on so you have time to adjust should you veer off track. Online retirement calculators are a great place to start, so long as you’re realistic about how much income you’ll need and how much you can reasonably expect to earn on your investments each year. Once you run the numbers and identify your target, you should have a pretty good sense of how much you should be setting aside to reach your goal.

2. Limit your positions

Another bit of advice we regularly give traders is to never risk more than 5% of their trading assets on a single trade. There is simply too much volatility in most short-term strategies to justify being overexposed to any one position.

The same idea holds true for long-term investing. Diversification—or spreading out your investments across multiple “baskets,” or asset classes—helps ensure you aren’t overexposed to the performance of any one part of the market. Furthermore, while it’s acceptable to trade individual securities in your long-term portfolio, you should be concerned if a single stock accounts for more than 10% of your total equity portfolio—this includes your employer’s stock. If your exposure is higher, you’re putting yourself at risk of a major financial setback if the stock plunges.

To mitigate company-specific risk in your long-term portfolio, consider mixing in mutual funds and exchange traded funds (ETFs), which can be a great way to make focused positions on specific niches of the market while spreading out your risk.

3. (Don’t) let your winners run

In trading, it pays over the long run to cut your losses short and let your winners run. But with long-term investing, the opposite approach is often more advantageous. This is the whole premise behind rebalancing: When your winners grow so much that they exceed your target allocation, you sell the excess and reallocate that money toward the parts of your portfolio that are underperforming. In a rising market, it’s human nature to want to ride it up to see how far it will go, but this can lead to situations where your portfolio gets imbalanced and you’re taking on more risk than you’re comfortable with.

On a related note, don’t make the mistake that many traders do by mentally transferring a losing position in their trading account to their long-term portfolio, on the expectation that it has to rebound eventually. While you might eventually be proven right, you could also be proven fantastically wrong and end up undermining your long-term portfolio. Mentally transferring losers into your long-term portfolio will also give you a stilted view of your trading performance and may make you think you’re performing better than you actually are.

4. Act in increments

It’s tempting to try to time the market, but it’s one of the biggest mistakes long-term investors can make. Every market cycle is different, and trying to time your trades to correspond with the top or bottom of the market will rarely work in your favor. When it comes to trading, scaling in and out of positions is a strategy that can help capture gains and curtail regret.

With your long-term investments, you can make similar tactical moves to scale up or scale back parts of your portfolio that you believe may be poised to over- or underperform. That’s why most asset allocation models are expressed in ranges: You can make small adjustment within the range while sticking to your plan. For example, if your target stock allocation is 55%–65% of your portfolio and you’re worried about the market topping out, then you could cut back your exposure to the lower end of the range. If the market keeps rising, you’re still in a position to capture some of the gains—but if it does indeed retrench, your reduced stock exposure should help minimize your losses.

5. Stay in your lane

It’s important to periodically check in on how your investments are performing, regardless of your investing time frame. Traders are often lured by tall tales of trades that did fabulously well, and think they’re underperforming if their own results are more modest. Far more important is your “expectancy,” or the average amount you’re winning and losing on each trade.

You need to set personal guardrails for your long-term portfolios, as well. Benchmarks can be helpful for grading specific funds, but it doesn’t matter how your overall portfolio compares to the S&P 500® Index. What matters is how your investments are performing relative to your own expectations and goals. Are you on track to save enough? Are you taking a comfortable amount of risk along the way? These are the questions you should be asking every time you sit down to analyze your results.

A balanced view

As fun as trading can be, for most it’s not going to pay the bills or foot life’s biggest financial outlays such as retirement. But it can teach you some valuable lessons when it comes to managing the money that will.

If you find yourself not as engaged in this important aspect of your financial future, here’s one last piece of advice: Reach out for help. A financial advisor can be a key ally in establishing a plan that is specific to your situation and needs. Even if you already have a plan in place, it can be a good idea to have someone regularly check your progress and bring your attention to areas that lack focus.

When it comes to securing your financial future, there’s no substitute for good vision.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions.

Investment returns will fluctuate and are subject to market volatility, so that an investor’s shares, when redeemed or sold, may be worth more or less than their original cost. Shares of ETFs are not individually redeemable directly with the ETF. Shares of ETFs are bought and sold at market price, which may be higher or lower than the net asset value (NAV).

Diversification and rebalancing strategies do not ensure a profit and do not protect against losses in declining markets.The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.

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